Why Special Bottlings Are Often Scarce
The Eternal Hunt for the Bargain
The year 2015 has passed. And with it the hunting season for one or the other special bottling. Ardbeg Perpetuum, Glenmorangie Tùsail and Highland Park Odin immediately come to my mind. And since Homo sapiens has spent most of its evolution as hunter and gatherer, the hunt for whisky already begins around Easter this year.
The first 'royal stags' have already been sighted. Of course they are again descended from the three species mentioned above. Glenmorangie Milsean, Ardbeg Dark Cove and Highland Park Ice are on the market. Accordingly, the telephones are starting to ring, and the real hunters are trying to climb as many deer stands as possible to secure their prey.
But enough of these allegories. Those who desperately want one of these bottles call many retailers and try to reserve bottles. And when you're successful with more than one retailer, the auction platforms on the internet are already waiting for you (at least in Europe), where these bottles generate double the proceeds in no time. In the financial world this is called arbitrage. You take advantage of the price differences on different markets.
The annual special bottlings have been enjoying growing success for the last ten years. While at the beginning there were still some bottles available in the following year, the demand grew from year to year. Word got around that these whiskies were of exceptional quality and could be resold with high profits on the collectors' market. With this later profit you could buy three bottles of the current special releases. One for consumption, one for collecting and one - as usual - for later resale. This was a sure-fire system and financed many whisky collections.
However, with growing demand and growing numbers of bottles per special release, also the stocks of particular casks were reduced. While these special bottlings used to contain old whiskies with age statements, today they're often no-age-statement whiskies. Collectors don't care much about that, but the connoisseurs are audibly beginning to complain. Social media is full of it.
Why does a distillery release special bottlings in the first place? There are essentially three reasons. First, these whiskies are for customer care. Only few customers are so convinced of a distillery that they buy whiskies from them exclusively. Single malt whisky rather thrives on its diversity, on the different taste profiles of the distilleries. When a fan learns about a new special bottling of his favourite distillery, he will readily buy it. He loves the variation and runs little risk of disliking it because he already knows and appreciates the basic taste of the distillery.
This customer-distillery relationship is a win-win situation, which leads us to the second reason. The distillery can sell one bottle more to the customer and outdo the competition. And since it is a special bottling, they can even charge more, making more profit.
The third reason is of a long-term nature. By communicating these special bottlings on the market the distillery gets more attention. The brand becomes better known, and other connoisseurs become more aware of the regular bottlings, too. Despite selling special bottlings at higher prices and thereby increasing the profit, the brand gains in reputation and visibility - a considerable advantage on the highly competitive whisky market.
But nothing lasts forever. It would have been too good if this game could have been played forever. Demand for these special bottlings skyrocketed after the end of the financial crisis, and the special bottlings were only available at online shops for a few days. Moreover, the selling expenses for these bottles increased drastically for the retailers. For each bottle sold there were multiple phone calls and attempted reservations. In addition, more and more often the retailers weren't told the correct number of bottles they were going to receive. Reservations for customers couldn't be fulfilled, and down payments had to be refunded.
The retailers reacted accordingly. Instead of charging the recommended prices, they increased the prices with every new release. Eventually collectors and connoisseurs were fed up. Why should they keep buying these special bottlings? Why pay three-digit prices for NAS whiskies? Also the margin for later resales dropped significantly. While you could easily achieve a 100% margin in the past, this margin eventually sank to 20% to 30%. The three-digit price also kind of increased the financial risk. Last but not least speculation had become less and less profitable. The number of bottles was just too low, and the connoisseurs were willing to spend more money than the speculators.
With the Highland Park Odin an online retailer in Germany conducted an experiment to sound out the market. Instead of charging the recommended 300 Euros (approx. 340 US$), they charged 600 Euros (680 US$) in their online shop. A ridiculously high price, completely detached from reality. They wanted to make the whisky so expensive that nobody would buy it immediately any more. They also stated that they would lower the price at irregular intervals by different amounts without prior notice. Customers would just have to wait with the purchase until the whisky arrived at a reasonable price.
The technical term for this is 'reverse auction'. They assumed that selling the three-digit number of bottles they had available would take several weeks. But they were in for a big surprise. Without having lowered the price once, they sold all bottles at double the price recommended by the producer on one weekend.
What the heck?
To put it mildly, the industry was perplexed. How could this happen? What was the reason for the behaviour of the customers? The laws of the market seemed to have become void. Apparently the right whisky bottle can be sold at any price. Did they give away money? Could they have charged even 900 or 1,200 Euros? When does such a sale become immoral?
After some reflection they came up with the solution to this enigma. The number of millionaires is steadily increasing globally. There are about 1% income millionaires in the developed countries. With a western civilization of approximately 1 billion people this corresponds to about 10 million individuals who don't really have to worry about their daily expenses any more. But these 10 million people don't all buy whisky ... unfortunately. ;-)
According to our calculations there are about 0.3% whisky connoisseurs. We define this 'average connoisseur' as someone who buys at least half a dozen of better-quality whisky bottles per year. This means that among the 10 million millionaires there are 30,000 whisky connoisseurs.
When a special bottling appeals to the connoisseurs, you can charge almost any price for batches of less than 30,000 bottles. The market will absorb them either directly, if the retailer has access to these millionaires, or indirectly via later arbitrage transactions.
This millionaire effect affects the whisky scene considerably. High-class special bottlings with a real surplus value, such as old age, can be sold at arbitrary prices. I remember the old 40-year-old and 50-year-old originals from Macallan. They were almost impossible to obtain, ridiculously priced, and wandered straight from production into the safes or throats of the super-rich. Whisky had become a two-class society. But who would blame the producers? Especially a producer like Macallan, which is run by a charitable foundation? Indulgence for a noble cause - where's that even possible?
This unobtainability of the really interesting special bottlings has also angered the normal connoisseurs, though. Why should they buy the normal whiskies from a distillery if they don't even have the slightest chance of getting one of the special bottlings? It used to be possible with some effort, but today only the price counts. While there are no real entry-level models with luxury goods such as Rolex, Bulgari or Louis Vuitton, the whisky connoisseurs must put up with this separation of luxury and the common folk. This doesn't always go down well. Although you're very successful as a producer, the market value erodes.
Today (2016) it seems the producers have begun to rethink. There are still bottles of the 2015 special releases available - admittedly at high prices, but nevertheless. The number of bottles could be increased by getting rid of the age statement. And the pressure on the price that comes with that makes the collectors and connoisseurs relax a bit again.
At the end of the day there are two losers anyway. On the one hand the connoisseurs who have to put up with no-age-statement whiskies. On the other hand the speculators who have lower chances of arbitrage profits due to the increasing number of bottles.
Horst Luening, March 2016